Old news

Provincial Finance Minister Tom Marshall is right: when a provincial budget depends on commodity prices for one-third of the money coming it, dramatic price dips in those commodities are bound to have serious effects.

Those dips, this year alone, have catapulted the province’s single-year deficit numbers from an expected $258 million to $750 million, essentially tripling the expected deficit.

The deficit comes from lower-than-expected oil and mineral prices and a worldwide decline in demand.

But while Marshall may be right about the risks, they are really nothing new. The only remarkable thing is that province didn’t see the need to plan for the eventuality. Even lowly editorial writers have been pointing out the risks for years.

Here’s a snippet from The Telegram’s post-

budget editorial in 2009: “But there are critical issues involved in the total size of the government’s bills, and where the money is coming from. Non-renewable oil revenues accounted for 32.8 per cent of the province’s revenues in 2008. That’s a crucial number, because oil prices fluctuate and oil output is expected to decline, and there are not many other sources of capital, should oil revenues dip. There is no doubt that this province has had to spend money to bring its citizens an adequate level of public services. The only questions are how big can government get? And how long will it be until there are real problems finding the cash to support that style of expanding government?”

And in 2010: “We’ve got all our eggs in one oilfield basket. Last year, one out of every four dollars of provincial revenue was forecast to come from offshore royalties. This year, it’s forecast to be one out of every three dollars. But oil is a finite resource, and government commitments go on and on. And while the budget this year says, ‘we are investing in diversification to broaden our foundation,’ that foundation is getting narrower, at a time when oil reserves are getting smaller. When, exactly, is it time to apply the fiscal brakes?”

That’s only two editorials. There are plenty more. But you get the point.

For the past few years, we’ve been lucky enough to have the commodity dice fall in a way that’s helped our economy.

Well, that luck’s run out for this year, and likely for next year as well, right in the middle of discussion about the province’s single-largest investment ever.

And while Marshall says no one should be alarmed about that timing — that Muskrat Falls will pay for itself (more to the point, that customers in this province will carry the fiscal freight) — you’ve got to wonder what will happen with things like electrical demand as one of the province’s largest employers, the provincial government itself, not only gets ready to put on the brakes but actually plans to shift into reverse.

Here’s a simple question: if you pat yourselves on the back for being fiscal geniuses when the commodities dice fall the right way, what do you do say about your performance when they come up snake eyes?

The answer seems to be to wash your hands of any responsibility and shift the blame to the world economy.

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Recent comments

I write to express my frustration and anger at the reckless and myopic outlook of this administration toward its finances. Mr. Marshall is by all accounts a gentlemen but his performance as Finance Minister leaves a lot to be desired. His idiotic assertion that Muskrat Falls will pay for itself is reflective of a government that is essentially clueless or supporting its corporate friends at the expense of the ordinary person. The consumer will pay 25-30 cents per kwh, whether blended or not, because it will cost that much to produce and transmit it. Every kw going to Nova Scotia will be free so we pay for that in the end as well. I know they will do the Maritime Link but will they transmit any of our power for free IF we can find a buyer....didn't think so!!! The new mines in Labrador will get their power at a heaviliy subsidized rate so again....who will pay??? Chances are we will see little or none of the power coming to Island consumers because Holyrood, or some form of back-up, is not going anywhere and will be used when needed, but....we will still pay for all of it. Meanwhile, we double our debt to buy an asset we simply cannot afford. It's like me buying a Rolls; I'd love to own one but could never afford it. If I did, I could never afford to run it. Aside for all the legal uncertainties, this project is our own fiscal cliff and I call on government to step back and postpone sanctioning.

"....and shift the blame to the world economy" ........... and solve its government created fiscal mismanagement problem by locking 250 thousand ratepayers into providing government and Nalcor $14 billion (an average of about $250 million a year for the next 50 years) for Muskrat Falls' debt servicing and operating costs. Then, on top of that, take another $20 billion (an average of about $400 million a year for the next 50 years) out of the pockets of low and middle income ratepayers and tout it in the House of Assembly as new revenue that will solve government's fiscal problems (on the backs of ratepayers/taxpayers) -------- a 100% shell game, whereby Muskrat Falls is the way in which $35 billion will be surreptitiously removed from the pockets of ratepayers and shared between government and Nalcor ---- to solve government's fiscal mismanagement / problem and to use ratepayers to pay for power supplied to the mining companies in western Labrador...... Ratepayers need to think about that. ------ Canada is very concerned about (and the federal government is scrapping) its planned $44 billion (over 40 years) for new fighter planes because the whole country (35 million people) can't afford it, but here we are about to entrench in provincial law the legal obligation for 250 thousand people to cough up $35 billion over 50 years for unneeded Muskrat Falls power..... Please wake up before it is too late.

Old news is right, I recall news articles from a year or two ago about Dr. Wade Locke's warning to the Dunderdale government to stop spending like drunken sailors. But since when did the Dunderdale government ever listen to sensible advice? Fools.

There is one great disturbing fallacy that gnaws away at government's case for Muskrat. It is the oft repeated assertion that this huge hydro-electric investment somehow protects our economy from the vagaries of the oil and gas market. It is the notion that it somehow removes some of our eggs from that one basket - that if, as we are now witnessing, the price of oil should fall, we'd still have electrical power on which to fall back. Unfortunately the argument ignores Gossen's Second Law, otherwise known as the Law of Substitution. This principle of economics dictates that the consumer will substitute one commodity for another until the marginal utilities from all commodities are equal. We already know that Muskrat will represent one of the most expensive BTUs of power anywhere in Canada if not the world. The trend in this province has been away from fossil fuels in favour of electricity for domestic heat. But that trend could easily reverse itself if
oil prices drop and and electricity becomes expensive by comparison. By moving back to high efficiency oil heat, or by adapting to any one of the growing number of green energy solutions, consumers on the island could create an enormous headache for Newfoundland and Labrador Hydro. Hydro will have a take or pay contract with NALCOR, and as legislated by government and laid out in the federal loan guarantee, it will shoulder the entire cost of amortizing the Muskrat debt. If consumption falls, its only recourse will be to raise the price per kilowatt hour even higher - resulting in the loss of yet more customers and giving rise to yet higher prices. At some point, this upward spiral will run into another economic principle - the law of diminishing returns. Hydro will advise NALCOR, and NALCOR will advise government, that any further effort to raise rates will be useless because total revenues would only decline. At that point, government would have no choice but to subsidize domestic power rates. It would be doing so, of course, under dismal fiscal and economic circumstances that included declining oil royalties, resurgent outmigration, and soaring debt. It does not take a soothsayer to see the potential ugliness of a provincial economy handicapped by an unnecessary, exorbitant, risky public investment in a power development that flies in the face of a paradigm shift in energy markets worldwide. Should that happen, Dunderdale, Kennedy, Marshall and Martin will emerge from their very comfortable retirements long enough - as Wangersky puts it - to wash their hands of responsibility and shift the blame to the world economy.

You say 'what will happen with things like electrical demand--- when the government shifts into reverse'? Dunderdale said in the House this week, there is nothing to worry about as long as people continue to pay their light bills, the revenue for the Muskrat falls project will be fine. In the 1930's many people who had connected up for lights couldn't afford the one dollar per month fee and got disconnected. The Premier is right , that the light bills will continue to be paid. But the overall power bill and in particular the heat bill is a different issue. For a family paying 3000.00 a year for electricity, 120.00 is for lights and 2070.00 is for electric heat. And the people have the option for efficient electric heat to save 1300.00 per year on their heat, with no loss in comfort. And each resident who does so will cut their demand for electricity by over 30 percent. Now if they turned off all their lights they would cut electricity demand by just 4 percent. Someone should point out to the Premier the difference between the effect of lights versus heat, and the effect on Muskrat revenue. This is the paradox: the very rationale for Muskrat is the need for more electric heat for the island, and the real threat to muskrat revenue is efficient electric heat. Most people are not stupid. As power prices rise , more and more will abandon the baseboard heaters and use efficient electric heaters. I would suggest readers to see my recent analysis published a few weeks ago in the Telegram " Energy efficiency by the numbers'. Is our Premier blind to this risk, or just getting bad advise? She can trust Nalcor and MHI who say we have reached efficiency saturation, or beleive the truth, which is the heat demand is very vulnerable to 65 percent decline. With even modest rate of people opting for this, the demand forecast will be slaughtered. And just try to stop people from jumping ship form inefficiency to efficiency. I will likely set up a website dedicated to assist people onto the efficient heating highway. Aferall, the power companies are failing to do anything meaningful. So, it's not the lights, stupid, it's the heat. Let's get that straight.

responsibility the government who does that with the government the only responsibility the government takes is not telling the society what is going on and you can believe it they spent and waste more time and money is spent hiding it until it is some thing new happens to come out and then there is some thing else to spent time and money on and gives the government time for there pay checks and perks???? and when some thing goes on they complain to the taxpayers about the budgets and what they can spend and what they have not got to spend????

....so...does the Tely think the gov. is washing their hands of this current financial situation? I don't think that's true...and I'm not even an investigative journalist. The government has been saying for more than a year that we would be running deficits this year and next....they will be higher than predicted, but external circumstances do affect our economy. As well...I have not heard anyone say that they were a genius...other than the crack team at the Tely....